Multiplicity in General Financial Equilibrium with Portfolio Constraints

35 Pages Posted: 27 Mar 2006

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Anna Pavlova

London Business School; Centre for Economic Policy Research (CEPR)

David Cass (deceased)

University of Pennsylvania, School of Arts & Sciences, Department of Economics (deceased)

Juan Manuel Licari

University of Pennsylvania - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: July 2006

Abstract

This paper explores the role of portfolio constraints in generating multiplicity of equilibrium. We present a simple financial market economy with two goods and two households, households who face constraints on their ability to take unbounded positions in risky stocks. Absent such constraints, equilibrium allocation is unique and is Pareto efficient. With one portfolio constraint in place, the efficient equilibrium is still possible; however, additional inefficient equilibria in which the constraint is binding may emerge. We show further that with portfolio constraints cum incomplete markets, there may be a continuum of equilibria; adding incomplete markets may lead to real indeterminacy.

Keywords: Multiple equilibria, asset pricing, portfolio constraints, indeterminacy, financial equilibrium

JEL Classification: D51, D52, D84, G12

Suggested Citation

Basak, Suleyman and Pavlova, Anna and Cass (deceased), David and Licari, Juan Manuel, Multiplicity in General Financial Equilibrium with Portfolio Constraints (July 2006). PIER Working Paper No. 06-012. Available at SSRN: https://ssrn.com/abstract=889506 or http://dx.doi.org/10.2139/ssrn.889506

Suleyman Basak

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)

HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Anna Pavlova (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)

HOME PAGE: http://faculty.london.edu/apavlova

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Cass (deceased)

University of Pennsylvania, School of Arts & Sciences, Department of Economics (deceased)

Juan Manuel Licari

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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